NEW YORK (Reuters) – Level 3 Communications Inc. on Tuesday said it agreed to buy rival Broadwing Corp. for $1.4 billion in cash and stock to expand its services for other telecommunications providers as well as corporate customers.
The deal is the latest in a shopping spree by Level 3, which this year has agreed to buy privately held companies Looking Glass Networks Inc., TelCove Inc. and ICG Communications.
Level 3 will pay $8.18 in cash plus 1.3411 shares of Level 3 for each share of Broadwing, a provider of communications services to other service providers and to enterprises.
The deal values Broadwing at $15.31 per share, or 15 percent over its closing price of $13.28 on Nasdaq on Monday.
Janco Partners analyst Donna Jaegers said the deal was driven by stiff competition and consolidation among bigger players such as AT&T Inc, which bought SBC and plans to buy BellSouth Corp, and Verizon Communications, which bought long distance provider MCI.
“There are too many wholesale carriers and there’s always the risk of price competition and with the Bells taking traffic on to their own networks, that’s forcing these carriers into each others arms,” said Jaegers. Bell operators Verizon and AT&T expect savings from moving traffic from wholesale suppliers.
Jaegers expects more consolidation in the U.S wholesale telecom market. Remaining players include Qwest Communications International Inc., Global Crossing Ltd. and XO Communications, a subsidiary of XO Holdings Inc.
XO shares rose 15 cents or more than 3 percent to $4.90 in morning over the counter trade. Global Crossing stock rose $1.20 or 5.4 percent to $23.35 on Nasdaq. Qwest stock was up 7 cents at $8.25 on the New York Stock Exchange.
Wholesale and Enterprise
Broadwing shares were up $1.97 or almost 15 percent at $15.25 in morning trade on Nasdaq. Level 3 shares were up 20 cents or almost 4 percent at $5.53.
About half of Broadwing’s revenue comes from the wholesale service provider market; the rest comes from business customers, Level 3 said.
“The acquisition of Broadwing is consistent with both the Level 3 wholesale market strategy as well as our more recent entry into the enterprise market,” said James Crowe, chief executive of Broomfield, Colorado-based Level 3.
Level 3 said it expects the deal to contribute positive adjusted operating income before depreciation and amortization in 2007, and to generate $200 million to $250 million of such income in 2008.
It expects the deal to contribute $200 million in free cash flow in 2009, including savings and total integration costs of $110 million to $130 million.
The cash portion of the deal totals $744 million, while the stock portion totals 122 million shares, Level 3 said. The $1.4 billion deal value is based on Level 3’s closing share price of $5.32 on Monday on Nasdaq.
The companies expect the deal to close in the first quarter of 2007, subject to regulatory and shareholder approval.
As of June 30, Level 3 said it had $1.4 billion in cash and marketable securities on hand, as adjusted for earlier acquisitions, its sale of Software Spectrum, and debt redemptions.
Level 3 was advised on the deal by Evercore Partners, JPMorgan and Merrill Lynch & Co. Its legal advisors were Willkie Farr & Gallagher LLP. Thomas Weisel Partners LLC and Goldman Sachs & Co. advised Broadwing in the deal and its legal representative was Greenberg Traurig, LLP.
Fuente: Reuters, Sinead Carew